Best practices for SKU rationalization

By Shaun Bossons, info.us@aldatasolution.com

The push towards SKU rationalization is not new, but in cost-conscious times, it is receiving more scrutiny today than ever. Just a year ago, the Wall Street Journal reported that industry executives and analysts anticipated large retailers to scale back their product assortment by 15%. SKU rationalization is not a silver bullet, but can help to improve merchandising, reduce out-of-stocks, cut excess inventory and improve the bottom line for retailers.

The following list provides key considerations for retailers when planning for SKU rationalization:

1. SKU rationalization as part of an item lifecycle management process: Retailers should implement SKU rationalization only as an element of an overall item lifecycle management approach as a means to effectively deliver positive financial results to the company.

2. Shopper requirements: It is critical for retailers to understand their target shoppers’ requirements in terms of variety and brand choice for every stocking category with their SKU rationalization approach, ensuring that they are able to continue meeting shopper expectations throughout the process.

3. Align SKU approach with retail banner strategy: A retailer’s assortment must be consistent with their store banner strategy. For example, retail banners that target large, brand-loyal family shoppers will likely require more SKU variety than a retailer that targets smaller, limited income families.

4. Forecast switching and cannibalization: Retailers should have the ability to accurately forecast brand switching and sales cannibalization to fully understand the financial impact of SKU rationalization decisions before implementing them in store.

5. Consider marketplace product availability: Retailers must understand product availability within their store trading areas to make ideal decisions related to SKU assortment. This will ensure retailers offer selection consistent and competitive with alternative shopping channels.

6. Visibility into product carrying costs versus incrementality: Retailers must find the optimal point on their cost/profit curve that drives the best financial results for the company. Consider the law of diminishing return will create excessive costs or lost profit  at all but one spot on the curve.

7. Tailor decisions at a meaningful level: An increasing number of retailers are executing category tactics such as assortment on a store-by-store basis. While this level of planning proves highly accurate, it is not always necessary to achieve desired financial impact. Instead, retailers should tailor their SKU rationalization decisions at a level across their store network that is meaningful for their business.

8. Test before you execute: SKU rationalization can dramatically impact a retailer’s business -- both positively and negatively based on the accuracy of planning and execution. Rather than roll-out SKU rationalization decisions across the entire store network simultaneously, prudent retailers will implement planned decisions in a small group of test stores to measure the actual impact and validate their estimated impact.

9. Not a one-time adjustment but a change in strategy: Retailers should approach SKU rationalization as a change in their strategy versus a one-time adjustment in their business. This will avoid the dangerous cycle of over-assorting and abrupt reductions in selection that can alienate shoppers.

The strategic assortment step of category management is becoming more important than ever, and it is imperative that these key strategic decisions synchronize seamlessly with merchandising and other aspects of the retail chain, following steps to ensure high levels of compliance. Companies that look at SKU rationalization as part of their overall retail operations stand to gain the most and achieve the ROI that they are forecasting.

Shaun Bossons is senior VP at Aldata, Apollo Solutions Group. To contact Aldata, please e-mail info.us@aldatasolution.com.